Watchdogs got it right with alerts on dangers

Friday 16 September 2011 11:38 BST

Warnings from the Bank of England's financial stability watchdogs over the dangers that are posed by exchanged traded funds looked vindicated today, as its new interim financial policy committee prepared for its second formal meeting.

The huge £1.3 billion losses uncovered by UBS synthetic ETFs, which use derivatives to track baskets of shares, currencies and commodities, come after the FPC voiced concerns in June over the lack of transparency surrounding the financial instruments.

Members of the FPC gathered for a pre-briefing session ahead of the FPC's next meeting on Tuesday.

A paper co-authored by FPC member Alistair Clark said a successful "radar" of experts was needed to spot vulnerabilities in the financial system.

He said: "They need extensive knowledge of financial activity, including a capacity to interpret the implications of new products and forms of business activity."

The Bank is particularly concerned over synthetic ETFs, which use derivatives to track baskets of shares, currencies and commodities.

Unlike physical ETFs, they do not own the underlying asset. Instead, the "manufacturer" merely creates an artificial position aimed at reflecting the value of that asset.